BRITANNIA FY16: FY16 annual report highlights a healthy operating performance

BRITANNIA FY16

Britannia’s (BRIT) FY16 annual report highlights a healthy operating

performance, with revenue growing 10% YoY to INR86.8b and EBITDA

margin expanding 310bp YoY to 14.1% led by benign commodity

prices and premiumisation. EBITDA grew 43% YoY to INR12.3b (FY15:

INR8.6b). Operating cash flow increased to INR9.6b (FY15: INR5.8b),

supported by INR1.5b reduction (FY15: INR1.6b increase) in bank

deposits; adjusted for this, operating cash flow was INR8.2b (FY15:

INR7.4b). Adjusted earnings to cash conversion declined to 99% (FY15:

121%) as cash conversion cycle marginally increased to -17 days

(FY15: -20 days). Over FY12-16, although funds were primarily utilized

for capex and repayment of borrowings, we note that 19% of funds

were utilized to place inter-corporate deposits. This along with high in

cash and treasury investments has resulted in widening of the gap

between RoIC (165%; FY15: 101%) and RoE (46%; FY15: 55%).

Contingent liabilities increased by INR1b to INR1.5b (FY15: INR0.5b)

due to a rise in claims of statutory dues.



NNUAL

EPORT

HREADBARE

7 March 2017

The

ART

of annual report analysis



EBITDA margin expanded from 5.7%

in FY12 to 14.1% in FY16, primarily led

by gross margin expansion on account

of (a) premiumisation, (b) benign

commodity prices and (c) price hikes.



High investments in non-core assets

(106% of NW) led to RoE at 46%,

despite RoIC of 165%.

Investments in ICDs increased to 6.4b (36% of NW;

FY15: INR3.3b, 26% of NW).





Expanding EBITDA margin drives stellar operating

performance:

In FY16, consol. revenue grew 10% to

INR86.8b (FY15: INR78.6b). Benign commodity prices and

premiumisation led to expansion in gross margin to 42.4%

(FY15: 40.3%), part of which was invested in advertising. Ad

spends rose to INR7.4b (8.6% of revenue; FY15: INR6.5b,

8.4% of revenue). EBITDA rose 43% to INR12.3b (FY15:

INR8.3b), with margin up 310bp to 14.1% (FY15: 11%).

Earnings to cash flow conversion robust, but down YoY:

Operating cash flow rose to INR9.6b (FY15: INR5.8b), helped

by INR1.5b reduction in bank deposits (up INR1.6b in FY15);

adjusted for this, operating cash flow was INR8.2b (FY15:

INR7.4b). Adjusted earnings to cash conversion fell to 99%

(FY15: 121%) as cash conversion cycle rose slightly to -17

days (FY15: -20 days).

36% of NW in ICDs, part of which are to group

companies:

In FY16, investments in ICDs increased to

INR6.4b (36% of NW; FY15: INR3.3b, 26% of NW). Several

beneficiaries of these are also related parties. We note that

apart from ICD of INR0.4b to Bombay Burmah Trading Co

(related party), ICD of (a) INR1b extended to Bombay Dyeing

& Manufacturing Company has not been classified as related

entity and (b) INR1.5b has been given to Scal Services based

on comfort letter issued by Bombay Dyeing.

High fund allocation to non-core investments weighs on

RoE:

Superior operating performance led to a stellar increase

in RoIC to 165% (FY15: 101%). High allocation of funds

toward non-core investments which at INR18.7b, 106% of

NW (FY15: INR13.3b, 107% of NW) with yield of 6%. This led

to decline in RoE to 46% (FY15: 55%).

Stock Info

Bloomberg

CMP (INR)

Equity Shares (m)

52-Week Range (INR)

1,6,12 Rel. Perf. (%)

M.Cap. (INR b) / (USD b)

BRIT IN

3,091

2,406.0

3,575/2,523

-7/-11/-10

383.2/5.7

Shareholding pattern (%)

As on

Promoter

DII

FII

Others

Dec-16

50.7

11.0

17.4

20.9

Sep-16

50.7

9.5

18.7

21.1

Dec-15

50.7

27.8

0.0

21.4

Note: FII Includes depository receipts

Auditor’s name

BSR & Co. LLP, Chartered Accountants

Sandeep Ashok Gupta

(S.Gupta@MotilalOswal.com); +91 22 39825544

Mehul Parikh

(Mehul.Parikh@MotilalOswal.com); +9122 3010 2492 /

Somil Shah

(Somil.Shah@MotilalOswal.com); +91 22 3312 4975

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Investors are advised to refer through important disclosures made at the last page of the Research Report.

ART

Britannia FY16

ART #1

ACCOUNTING / AUDITING MATTERS

Benign commodity prices

and premiumisation led to

expansion in gross margin

to 42.4% (FY15: 40.3%)

Expanding EBITDA margin enables stellar operating performance



In FY16, BRIT reported 10% growth in consolidated revenue to INR86.8b (FY15:

INR78.6b), driven by standalone business (92% of consolidated revenue).

Benign commodity prices and premiumisation led to expansion in gross margin

to 42.4% (FY15: 40.3%), part of which was invested in advertising. Ad spends

increased to INR7.4b (8.6% of revenue; FY15: INR6.5b, 8.4% of revenue).

Decline in power & fuel and conversion costs helped contain operating and

administrative expenditure at INR21.2b (FY15: INR20.2b, 25.7% of revenue).

EBITDA increased 43% YoY to INR12.3b (FY15: INR8.3b), with margin expanding

310bp to 14.1% (FY15: 11%).

PBT (before exceptional items) increased 51% to INR12.1b (FY15: INR8b).

Exhibit 1: Significant expansion of EBITDA margin aids profitability growth (INR b)

Particulars

Net Revenue (Operations)

Raw Materials Consumed

Gross Margin

Operating and Administrative Expenses

Personnel Cost

EBITDA

Depreciation

EBIT

Financial Charges

EBT

Other Income

PBT (Before Exceptional Items)

Exceptional Items

PBT

Tax

PAT

FY15

71.8

43.2

28.6

19.1

1.8

7.7

1.2

6.5

0.0

6.5

0.9

7.4

1.4

8.8

2.6

6.2

Standalone

FY16

100.0

79.5

60.2

46.2

39.8

33.3

26.6

19.8

2.5

2.1

10.8

11.3

1.6

9.1

0.0

9.1

1.2

10.3

2.0

12.3

3.6

8.7

0.9

10.4

0.0

10.4

1.0

11.4

(0.1)

11.3

3.8

7.5

100.0

58.2

41.8

25.0

2.6

14.2

1.1

13.1

0.0

13.1

1.2

14.4

(0.1)

14.2

4.8

9.4

FY15

78.6

46.9

31.7

20.2

2.8

8.6

1.4

7.2

0.0

7.2

0.9

8.0

1.5

9.5

2.6

6.9

Consolidated

FY16

100.0

86.8

59.7

50.0

40.3

36.8

25.7

21.2

3.6

3.4

11.0

12.3

1.8

9.2

0.0

9.1

1.1

10.2

1.9

12.1

3.3

8.8

1.1

11.1

0.0

11.1

1.0

12.1

(0.1)

12.0

3.9

8.1

100.0

57.6

42.4

24.4

3.9

14.1

1.3

12.8

0.1

12.8

1.2

13.9

(0.1)

13.8

4.5

9.3

Source: Company Annual Report, MOSL

Exhibit 2: Increased investments in advertisements &

promotions (INR b)

Advertising and sales promotion (INR b)

% of net revenue

8.7%

8.8%

8.4%

7.7%

4.2

FY12

5.3

FY13

6.0

FY14

6.5

FY15

7.4

FY16

8.6%

Exhibit 3: Association with marquee events aids brand scaling

Source: Company Annual Report, MOSL

Source: Company, MOSL

7 March 2017

ART

Britannia FY16

Earnings growth primarily led by EBITDA margin expansion



Over FY12-16, PAT growth was significantly driven by margin expansion;

revenue growth has been on a declining trend.

EBITDA margin expanded from 5.7% in FY12 to 14.1% in FY16, primarily led by

gross margin expansion on account of (a) premiumisation, (b) benign

commodity prices and (c) price hikes.

This led to an increase in PAT (adjusted for exceptional items) from INR2b in

FY12 to INR8.1b in FY16.

Exhibit 5: …driven by EBITDA margin expansion (INR b)

EBITDA

EBITDA Margins (%)

14.1

74%

47%

14%

9.1

40%

17%

10%

3.1

FY12

4.2

FY13

6.3

FY14

8.6

FY15

12.3

FY16

5.7

6.8

11.0

Exhibit 4: PAT growth outpaces revenue growth…

Revenue growth

Adjusted PAT growth

49%

20%

30%

13%

FY13

12%

52%

PAT growth

FY12

FY14

FY15

Adj. for exceptional items Source: Company Annual Report, MOSL

Source: Company Annual Report, MOSL

Exhibit 6: Benign commodity prices aid EBITDA margins

Source: Company, MOSL

Operating cash flow remains robust



Cash flow from operations increased to INR9.6b (FY15: INR5.8b), primarily

supported by higher earnings. Further, we note that part of the operating cash

flows is supported by liquidation of bank deposits, adjusted for which operating

cash flow stood at INR8.2b (FY15: INR7.4b).

Earnings to cash conversion remained high on the back of robust operating cash

flow; it further improved to 111% (FY15: 103%). However, adjusted for variance

in bank deposits, it declined to 99% (FY15: 121%).

7 March 2017

ART

Britannia FY16



Cash conversion cycle has deteriorated from -20 days in FY15 to -17 days in

FY16. This is owing to an increase of a day each in inventory and receivables,

while reduction of a day in payables has resulted in cash conversion cycle

marginally deteriorating to -17 days (FY15: -20 days).

Part of the operating cash

flows is supported by

liquidation of bank

deposits, adjusted for which

operating cash flow stood

at INR8.2b (FY15: INR7.4b).

Exhibit 7: One-offs amplify otherwise robust operating cash flows (INR b)

Particulars

PBT

Add/Less: Non-cash adjustments

Add/Less: Non-operating adjustments

Less: Direct Taxes Paid

Operating Profit Before Working Capital Changes

(Increase) / decrease in inventories

(Increase) / decrease in trade receivables

(Increase) / decrease in loans and advances and

other assets

(Increase) / decrease in bank balances (other than

cash & cash equivalents)

Increase / (decrease) in liabilities and provisions

Cash Generated from Operations after Tax

Less: Financial Cost paid

Free Cash Flow from Operations post Interest

Less: Capital Expenditure

Cash Flows post Capex

FY15

9.5

1.4

(2.3)

(3.0)

5.6

0.2

(0.2)

0.1

(1.6)

1.8

5.8

(0.0)

5.8

0.5

6.3

FY16

12.0

1.1

(0.8)

(4.0)

8.3

(0.4)

(0.3)

(0.2)

1.5

0.8

9.6

(0.1)

9.6

(2.5)

7.1

Source: Company Annual Report, MOSL

Exhibit 8: Earnings to cash conversion consistently high

Earnings conversion (%)

137%

Adj. Earnings conversion (%)

121%

103%

111%

99%

Exhibit 9: Negative cash conversion aids CFO

Particulars

Inventory Days

Receivable Days

Advance from customers

Deposit from customers

Payable Days

Cash conversion cycle

(Days)

FY12

FY13

FY14

FY15

FY16

96%

97%

-8

-20

-17

Source: Company Annual Report, MOSL

FY12

FY13

FY14

FY15

FY16

Source: Company Annual Report, MOSL

19% of funds have been

utilized to place inter-

corporate deposits.

Cash flow from operations primary source of funds



Over FY12-16, operating cash flows remained the primary source of funds,

contributing 94% of fund requirement.

26% of funds have been utilized for capex, 24% for repayment of borrowings,

and 18% for dividend distribution. However, we note that 19% of funds have

been utilized to place inter-corporate deposits.

7 March 2017

ART

Britannia FY16

Exhibit 10: CFO primary source of funds

Sources of funds FY12-FY16

CFO

Other income

94%

Exhibit 11: 19% of funds utilized for ICDs

Application of funds FY12-FY16

26%

Capex

Dividend paid

ICD

Investments

19%

24%

Borrowings

Finance cost

18%

Source: Company Annual Report, MOSL

In FY16, ICDs increased by

INR3.1b to INR6.4b, 36% of

NW (FY15: INR3.3b, 26% of

NW).

High fund allocation in non-core investments weighs on RoE



Superior operating performance has led to a stellar increase in RoIC to 165%

(FY15: 101%). However, RoE has declined to 46% (FY15: 55%).

The widening gap between RoE and RoIC is on account of high allocation of

funds toward treasury investments (primarily MFs and bonds), cash and inter-

corporate deposits (ICDs) which stood at INR18.7b, 106% of net-worth (FY15:

INR13.3b, 107% of net-worth) with yield of 6%.

In FY16, ICDs rose INR3.1b to INR6.4b (36% of NW; FY15: INR3.3b, 26% of NW).

Several beneficiaries of these are also related parties. We note that ICD of (a)

INR1b extended to Bombay Dyeing & Manufacturing Company has not been

classified as a related entity, and (b) INR1.5b has been given to Scal Services

based on comfort letter issued by Bombay Dyeing & Manufacturing Company.

Exhibit 13: …weigh on RoE

ROE

ROIC

165%

6.4

101%

Exhibit 12: High investments in treasury and ICDS (INR b)…

Inter-corporate deposits

Treasury investments and cash

Yield

0.8

4.6

FY14

3.3

10.0

FY15

12.3

47%

38%

FY16

FY13

65%

50%

FY14

3.2

FY13

55%

FY15

46%

FY16

Source: Company Annual Report, MOSL

7 March 2017

ART

Britannia FY16

Exhibit 14: ICDs at 36% of NW (INR b)…

ICDs O/S (INR b)

% net worth

36%

26%

Exhibit 15: Related parties are beneficiaries of ICDs (INR b)

Particulars

Related Party:

The Bombay Burmah Trading Corporation Limited

Others:

Bombay Dyeing & Manufacturing Co. Ltd.

Scal Services Ltd.*

Others

Total

FY15

0.4

FY16

0.4

0.8

FY14

3.3

FY15

6.4

2.0

0.9

3.3

1.0

1.5

3.5

6.4

FY16

Source: Company Annual Report, MOSL

*Based on comfort letter from Bombay Dyeing & Mfg Co. Ltd

Source: Company Annual Report, MOSL

Contingent liabilities rises



Contingent liabilities increased INR1b to INR1.5b (8% of NW; FY15: INR0.5b, 4%

of NW). This is entirely on account of an increase in claims against the company

(including statutory dues contested) by INR1b to INR1.5b (FY15: INR0.5b).

Exhibit 16: Significant rise in contingent liabilities (INR b)

Contingent liabilities

% NW

0.3

FY12

0.5

FY13

0.4

FY14

0.5

FY15

1.5

FY16

Source: Company Annual Report, MOSL

7 March 2017

ART

Britannia FY16

ART #2

GOVERNANCE MATTERS

All directors regular in attending board meetings

The board comprises 13 members, out of which 8 are independent directors.



The company is regular in calling board meetings. In FY16, 7 board meeting were

held. All directors have been generally regular in attending the board meetings.



Independent directors Mr Nimesh Kampani, Mr Keki Dadiseth and Mr Avijit Deb

have been on the board for a period of more than 10 years. The Companies

Act 2013 mandates compulsory rotation of independent directors after 10 years,

prospectively from the date of implementation of the statute.



Exhibit 17: Directors regular in attending board meeting

Name of Director

Mr. Nusli N Wadia

Mr. Varun Berry

Mr. A K Hirjee

Mr. Avijit Deb

Mr. S S Kelkar

Mr. Nimesh N Kampani

Mr. Jeh N Wadia

Mr. Keki Dadiseth

Dr. Ajai Puri

Mr. Nasser Munjee

Mr. Ness N Wadia

Dr. Vijay L Kelkar

Mrs. Ranjana Kumar

No. of No. of Board

Category of Directorship

Meetings Meetings

held

Attended

Non-Executive Chairman

Managing Director

Non-Executive Director

Non-Executive and Independent Director

Non-Executive Director

Non-Executive and Independent Director

Non-Executive Director

Non-Executive and Independent Director

Source: Company Annual Report, MOSL

7 March 2017

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Britannia FY16

ART

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7 March 2017

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